Risk is a generally quantifiable measure of the likelihood of loss or less than expected results. Risk assessment is the process of analyzing such likelihood of loss or less than expected results or threats to and vulnerabilities of a system. Businesses and institutions assess risk on a daily basis and in a variety of contexts. For example, whether to engage a contractor to provide the services that the contractor claims it can provide involves an assessment of risk. The business must try to answer questions such as what is the likelihood that the contractor will be able to provide the services to the degree or quality requested or at the price or in the time frame stated. Whether to hire an individual as a new employee also involves an assessment of risk. Will the individual be able to perform as expected? Risk analysis with respect to potential new hires does not end there. While the individual may be suitable as a new hire, how much responsibility should the individual be given is another question the employer must try to answer. Should the new hire be given responsibility to handle the accounts of, for example, the employer's best customers? What about confidential or trade secret information? Should the new hire be given access to the some or all of the confidential information of the customers or access to sensitive or valuable inventory? Should the new hire be given access to the only certain or all of the confidential information of the employer?
Employers can also use the present invention to assess risk for new employees and the level of inventory security or access. Employers often have varying levels of inventory access such that some inventory is easily accessible while other inventory, such as inventory that is prone to loss, may be accessed only through additional security access. The present invention can assess the risk of each new employee to determine the level of inventory access.
Businesses and institutions in the banking, thrift securities, insurance and credit industries, and the credit union movement also assess risk with respect to a variety of services and financial instruments. For purposes of this application, the term “financial institution” will refer to banks, businesses and institutions in the banking, thrift securities, insurance and credit industries, and the credit union movement. A check is a commercial device intended for use as a temporary expedient for actual money. It is generally designed for immediate payment and not for circulation. A check is drawn on a bank or credit union. Immediately on presentment of the check, the financial institution is required to pay from a previous deposit of funds. Further, for purposes of this application, the term “check” will broadly signify any means by which the transfer of property from an account will be requested and will include those transfers also known by the terms “draft” and “sharedraft” and “negotiable instrument” and instruments and transfers that are within the definition provided by Section 3-104 of the Uniform Commercial Code. In the broad sense used within this application, the term “check” will also signify the requests processed by automatic clearing houses, electronic presentations and debit card and ATM transactions and all electronic presentations.
From time to time, checking account holders may accidentally or intentionally misuse the account. The term “checking account” is generally recognized as including the terms Demand Deposit Account (“DDA”), electronic account, paper account, reservable/non-reservable transaction account, interest bearing account, sharedraft account, Negotiable Order of Withdrawal account (“NOW”), deposit account, Money Market Deposit Account (“MMDA”), Automatic Transfer Service account (“ATS”), escrow account, or any type of transaction account, or for purposes of this application will identify also any account in which funds are deposited or withdrawn.
The financial institution may allow the customer to draw one or more financial institution checks against the customer's account when the total amount of the check or checks exceed the amount in the account available for such purposes. A checking account, however, in its simplest form does not contractually obligate the financial institution to honor checks written by the customer that overdraw the account. For purposes of this application, the term “overdraft” will identify that which results when a transfer of property is requested but for which the account from the transfer is requested does not have the property in the amount or type identified in the request.
A financial institution has a number of options when a check is presented to it for which the customer does not have sufficient funds in the designated account. Some of the options require the financial institution to have an agreement in place with the requesting party before the financial institution can exercise the option.
One of the options that a financial institution may employ with respect to an overdraft is that the financial institution may transfer property from another account. The account may be one in which money is held so that a request for the payment of money can be handled without another step. The account may be one also in which one or more forms of equities are held so that a request to pay money requires that one or more equities be sold first. This option is one which is prearranged by the customer and the financial institution.
Another option that a financial institution may employ with respect to an overdraft is that the financial institution may transfer property according to a prearranged line of credit or a loan account of any loan account type. The decision to allow a line of credit on an individual account as well as the amount of the line of credit is determined through generally accepted loan underwriting criteria as well as factors applied by the financial institution through an employee who has expertise in such areas, for example a loan officer.
A third option that a financial institution may employ is simply to return the overdraft without making the requested transfer. This may be termed the “not sufficient funds”, or “NSF” approach. The returned request may be considered as being “bounced”. Often times, a financial institution charges a fee to the customer that drew the overdraft. This fee, at the very least, is intended to cover the administrative costs associated with handling the request. If it exceeds the costs associated with the handling the overdraft, the fee may be a punitive measure. The payee that did not receive the intended transfer may also charge the drawor a fee that may, at least, cover the drawee's administrative cost in seeking and obtaining the designated payment.
As a fourth option, a financial institution that is confronted with an overdraft can also cover it with the financial institution's own funds—thereby causing the account to be overdrawn. The financial institution will employ this option only when the financial institution is confident that the customer will be able to cover the deficit in the not too distant future. Such treatment is typically reserved for the financial institution's better customers, such as those having a long term relationship with the financial institution and possible other accounts. Even with this option, the financial institution usually charges a fee for the overdraft.
A financial institution that does cover an overdraft typically does so in one of two ways: (1) at the item level such that a bank employee analyzes each item presented that would overdraw an individual's account and makes a determination to pay or not, or (2) at the account level, but only up to an amount that is pre-set across the board for all overdrafts. For example, the financial institution may adopt a policy that provides that only those overdrafts that total no more than $500. In excess of the funds available in the customer's checking account are to be honored. Such a policy is advantageous to the financial institution in that it limits the risk it has to any one customer to a set low level. Such a policy, however, may be disadvantageous to the customer who is keenly interested in ensuring that, if any overdrafts are honored, those that may be larger in amount (than the low limit set by the financial institution) and are directed to important debts are honored. The typical size of payments to cover larger debts varies from location to location. For example, while a typical mortgage or real estate tax payment in a rural area may be a small amount (say less than $1000.), the same type of payment in a developed or developing urban area would likely be greater in amount (say more than $1000.). Thus, an overdraft service set by a national financial institution of, for example, $500., may be meaningless for critical payments, such as those for rent, mortgage, car, tax, and insurance purposes. For purposes of this application, payments that are needed to maintain some property right or benefit are termed “critical payments”.
A financial institution that does adjust its overdraft limit for an individual customer does so but only generally after the financial institution has some extended experience in working with the customer and learning the customer's check writing habits. This requires the financial institution to expend critical resources (such as the time of the account representative assigned to handle the customer's account or the operations person assigned to handle the customer's account). It is certainly an approach that a financial institution can take only with respect to a few customers. Also, while the account representative may believe it is clear what the check writing habits of the customer are, this takes the financial institution time.
Rather than addressing the matter on an ad hoc basis, the financial institution may anticipate that the customer may draw an overdraft from time to time. For example, the financial institution and customer may enter into an expanded relationship under which the financial institution provides the customer a line of credit tied to the customer's checking account. The financial institution would then be obligated to pay on checks up to the maximum amount of the line of credit provided for this purpose. This expanded relationship with customers is commonly marketed by financial institutions under designations such as “overdraft protection”, “check-protection”, or “checking-plus” personal financial banking accounts. For drawing checks for which the checking account has insufficient funds, and employing the designated line of credit, a customer typically pays, at the least, on a per transaction basis and the interest for the credit actually extended to the customer.
The customer may avoid overdrafts also by pre-authorizing the financial institution to tie the customer's checking account to one or more of the customer's other accounts such as the customer's deposit accounts. The financial institution, when presented with a check that exceeds the amount in a customer's checking account, “sweeps” the necessary funds to cover the check from the designated deposit account or accounts.
While a number of different options are available to customers by which the customer may have overdrafts handled automatically, most customers do not take advantage of them. Customers are attracted to financial institutions by the low fees associated with simple checking accounts. Customers are wary of the fees associated with any extra services that financial institutions are capable of rendering such as those with lines of credit or sweep accounts. Also, customers do not wish to spend the small amount of time needed to set up the lines of credit or sweep accounts. Further, customers may not have the funds to establish another account—or may not have the funds in a “liquid” form. “Liquid means cash or the equivalent that can be converted to cash within a specified time limit. For example, a CD is not liquid because it cannot be converted to cash prior to its due date without a substantial penalty. Most customers additionally do not anticipate overdrawing their checking account.
Accordingly, financial institutions find themselves in the position of how to handle overdrafts for a large number of customers. Without a protocol in place for such customers not covered by one of the financial institution's other account programs designed to cover overdrafts—such as a sweep account or a checking account with a line of credit—, the financial institution must determine whether in all cases to simply refuse to honor the check or to pass the matter to the customer's account representative who must determine whether it is in the long term best interest of the financial institution to cover the check. Again, this item by item approach in handling such matters diverts the resources of the financial institution that may be better spent on other matters. Having to handle such matters on an ad hoc basis makes it difficult for a financial institution to allocate their resources. For example, an account representative may go for a long period of time without having to handle issues concerning an overdraft or overdrafts, then have to handle many of them on one day. Other issues that the account representative had to handle on that day may have to be sacrificed in order to handle the overdrafts. Given the limited amount of information that may be available to the account representative, it may be difficult for the representative to assess the risk and determine whether it is in the best interest of the financial institution to cover the overdraft. The shorter amount of time that a customer has been with the financial institution, the more speculative this estimate is, and the higher the risk to the financial institution. Also, because this process is judgmental, the risk assessment may not be uniform or consistent from one service representative to another. This opens the additional risk of discrimination through unequal or disparate treatment of account holders.
To decrease some of the risk, the financial institutions look to the information presented to them when the customer opened the account. Before a financial institution opens a demand deposit or a checking account for a prospective customer, the financial institution ordinarily requires that the prospective customer supply a certain amount of information. Such information is required to verify personal identification and to provide an alert against any negative information, such as lack of steady employment, lack of extended time at any one residence, or past poor relationships with other financial institutions. A preliminary screening of prospective customers serves to increase the predictability and reliability of subsequent transactions and thus allows the financial institution to better manage the account. A customer that provides information that satisfies the standards of the financial institution to open a checking account is said to be “qualified”. Standards of a financial institution include the presentment of a government issued photo identification card that confirms the individual's identity, and successfully passing an assessment of prior checking performance at other financial institutions, for example, screening for no negative past checking performance. Although, these are generally minimal requirements, financial institutions have the discretion to further require satisfactory credit history.
However, the information provided to the financial institution to qualify for an account typically does not provide the financial institution with specific information on the normal check writing habits of the particular customer or other customers similarly situated as the particular customer. Does the customer typically maintain a minimum amount of money in the checking account to cover certain payments while other money is, for example, kept in a deposit account? Does the customer typically write checks to cover the customer's rent or mortgage payment or automobile payment just before or contemporaneously with making a deposit so that the financial institution is often presented with one or more checks before the deposit funds have cleared? Does the customer, when contacted by the customer's account representative about the possible overdraft, immediately rectify the situation such as by authorizing amounts to be shifted from, for example, a deposit account to the checking account?
With only the scant qualifying information, and without specific information concerning the customer's behavior, the financial institution must make a decision whether to cover the check. Financial institutions, therefore, are in need of a system and methods to assist them in determining for what customers to pay on unsupported checks and the extent to which such checks should be covered. The present invention satisfies the demand.